DEVISING A FRAMEWORK FOR MANAGING SUBCONTRACTORS BY LEARNING FROM EXPERIENCE

Ziwei Tang 1 and S. Thomas Ng 2

ABSTRACT Subcontracting being employed by main contractors as a mechanism to alleviate their technical and financial risks is becoming more and more pervasive around the world. Studies indicated that over 90 percent of the work contents were subcontracted out resulting in a strong reliance on subcontractors’ performance to warrant an overall project success. Until now, subcontractor management has not been conducted in a systematic manner, and there is no standard guideline governing this type of decisions. Consequently, there is a need for the development of a more reliable mechanism for managing subcontractors. To do that necessitates a better understanding of the current subcontractor management practices of various constituencies. By applying the concepts of knowledge management, a more structured subcontractor management framework can be formulated. This paper begins by highlighting various international best practices. Information pertinent to subcontractor management is then outlined. Finally, a conceptual framework for managing subcontractors using the knowledge management idea is proposed. The conceptual framework provides a solid platform for the development of an information and communication technology based system for this type of decisions.

KEY WORDS Information technology, knowledge management, planning, building, paper instructions.

INTRODUCTION Managing subcontractors is an onerous task as more than 90% of the work in a construction project is entrusted to a series of trade specialists (Kumaraswamy and Matthews, 2000). Extensive usage of subcontractors not only would shift the roles of main contractor to project management and financial controlling (Hinze and Tracey, 1994), but also could increase their burden in subcontract administration and supervision. Despite risks can be propagated down the chain, with a relatively simple organisation setting and low capital investment certain subcontractors may not have the sufficient capability to carry out their job satisfactorily (Kumaraswamy and Matthews, 2000). As the party which takes up the overall contractual responsibility, the main contractor shall adopt a better strategy in selecting suitable subcontractors, supervising subcontractors’ work, monitoring their performance, and feeding the knowledge and information back to relevant parties to facilitate subcontractor selection (Tang, 2001).

Unfortunately, not much serious attention on subcontractor management has been paid by practitioners. While subcontractors are usually selected by head office’s contracting team based on their knowledge on trade specialists’ track record, the jobs of supervision and performance appraisal are rested with the project team on site. The problem is aggravated as the project team is recomposed each time, and hence not only would the practice in managing subcontractors vary, but valuable information on subcontractor performance could also go

1 Research Assistant, Department of Civil Engineering, The University of Hong Kong, Pokfulam,

Hong Kong. Phone +852 2857 8556, Fax +852 2559 5337, ziwei.tang@gmail.com 2 Associate Professor, Department of Civil Engineering, The University of Hong Kong, Pokfulam,

Hong Kong. Phone +852 2857 8556, Fax +852 2559 5337, tstng@hkucc.hku.hk

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astray as the project team decomposes. There is, therefore, a need for the main contractor to ensure all useful knowledge and information about subcontractors is captured in a structured manner and channelled back to the head office’s contracting team for decision support.

Knowledge and information management being successfully applied to many aspects shall have a great opportunity facilitating subcontractor management. To do that necessitates a better understanding of the current practices of subcontractor management in various constituencies. By learning from the characteristics, strengths and weaknesses of the current practices, a more structured knowledge and information management framework for subcontractor management can be formulated. This paper begins by highlighting various international best practices in subcontractor management. The information to be captured for subcontractor performance appraisal is then highlighted. Finally, a framework for managing the knowledge and information pertinent to subcontractor performance is proposed.

INTERNATIONAL BEST PRACTICES

UNITED STATES Army Corps of Engineers: The U.S. Army Corps of Engineers stores the history of contractor performance in a centralised electronic database known as CCASS (Construction Contractor Appraisal Support System). The database includes contractor performance as submitted by the U.S. Army Corps of Engineers as well as by other Department of Defense and Federal agencies. It further stipulates that where a subcontractor is known to exert significant influence on or control progress through a special relationship with the main contractor (as in the case of a subsidiary or an affiliated company), or by virtue of performing a significant portion of the contract, a performance evaluation will be prepared on the subcontractor, in addition to the evaluation report prepared on the main contractor. Subcontractor evaluations are stored in CCASS as in the case of the main contractors (ACOE, 1993). The performance evaluation report is prepared when a contract is completed unless a contractor/subcontractor in question has a poor performance in which an interim performance evaluation report shall be prepared for a period of three months. Moreover, the U.S. Army Corps of Engineers stipulates that these performance evaluation results must be used in any pre-award decisions.

Michigan Department of Transportation: Aiming to intensify their control over projects and to avoid contractors hiring poor performance subcontractors, the Michigan Department of Transportation constrains the maximum percentage of subcontracting (MDOT, 2004). Main contractor shall perform at least 40 percent of the work themselves whilst subcontractors are not permitted to sublet more than 50 percent of the subcontract work to lower tier subcontractors. Similar as the Army Corps of Engineers, final performance evaluation reports for both the main contractors and subcontractors are prepared while interim evaluation reports may also be issued. Information pertinent to the past performance evaluation may be considered during the prequalification stage.

State of California: The State of California, on the other hand, demands a mandatory disclosure of participating subcontractors. By specifying certain information about subcontractors who would perform more than 1/2 of 1% of the work to be provided by the main contractor, the main contractor is discouraged from engaging unknown and poorly performed subcontractors to work on the projects. This requirement does not apply to those in which the influence to project success is minimal.

Ohio Department of Transportation: According to the Ohio Administrative Code, the performance of every main contractor and subcontractor shall be subjected to evaluation on a project basis (ODOT, 2000). Every year, subcontractors will be evaluated for each of the

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project they have performed, and the average score of the previous calendar year serves as an incentive for benchmarking and determining the bidding opportunity.

Kentucky Transportation Cabinet: The Department of Highways in Kentucky has developed a performance evaluation system for contractors and subcontractors. The evaluation system is conducted annually in all projects. Each being evaluated is given a summary rating based on all projects they have conducted for the Department during the year (DOHK, 2001). This rating is not only used for prequalification but also for determining the capacity of subcontractors for the coming year.

Other Public Clients: The State of Wisconsin, Commonwealth of Massachusetts, and so on all have similar subcontractor performance evaluation framework. As for the Department of Transportation and State of Georgia, subcontractors on contracts over US$500,000 must be registered on a mandatory basis (GDOT, 2005). Unlike the traditional practice whereby works are sublet by the main contractors, the Washington State Government requires all subcontract works to be solicited by competitive bid.

UNITED KINGDOM Trust Mark Programme: The UK construction output is the second largest in the European Union. A Trust Mark programme was initiated by the Department of Trade and Industry (DTI) to help consumers identify reputable builders, plumbers, electricians, decorators and other specialist traders such as those for home repair, maintenance and improvement work. All Trust Mark registered firms are assessed and monitored according to a set of core approval criteria by DTI’s approved scheme operators (DTI, 2006). DTI believed that “the Quality Mark provides a peace of mind and represents better long-term value for money.”

Constructionline: Instigated by the recommendations of the Rethinking Construction report (Latham, 1994), a database of over 12,500 accredited local and national contractors, subcontractors and consultants named as Constructionline was set up to ensure quality suppliers were procured (DOI, 2006). Being the largest registry in the UK, Constructionline is owned by the DTI. Local governments do apply Constructionline in their pre-qualification and tendering process to streamline the procurement procedures and save valuable resources.

Construction Best Practice Programme: A benchmarking gateway known as KPIZone was developed under the Construction Best Practice Programme which enables all sections of the construction industry including the main contractors, mechanical and electrical contractors, consultants, suppliers, and so on to set performance targets and measure them according to suitable key performance indicators (Constructing Excellence, 2007).

ASIA-PACIFIC RIM Queensland Government’s Department of Public Work: In Australia, the Department of Public Work in the Queensland Government requires contractors and subcontractors seeking to undertake public work valued at AUS$250,000 or more to register on their whole-of-government prequalification system (PQC) – a central registry of prequalified contractors for use by all government departments (Queensland Government, 2003). In accordance with the Queensland Government's PQC system, contractors undertaking any government projects at or above AUS$250,000 will be evaluated on their performance. The performance reports are based on the discussion between the contractor’s representative and the superintendent, and this has to be completed every 13 weeks for contracts longer than 20 weeks; and within 14 days before practical completion and the issuance of final certificate.

Construction Agency Coordination Committee: The Construction Agency Coordination Committee under the New South Wales Government, Australia provides guidelines on subcontracting which stipulates that “if required by the contractor, the subcontractor must meet regularly with those concerned with the contract, at the times specified by the

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contractor, to evaluate and monitor performance of the subcontract and project” (NSW, 2003). These regular meetings help subcontractors to recognise their deficiency so that they can improve their performance during the rest of the construction process.

Singapore List of Trade Subcontractors Registry: In Singapore, all subcontractors seeking registration with the Singapore List of Trade Subcontractors registry must satisfy the requirements set forth by the Singapore Contractors Association Limited which include their company status, personnel resources, financial capability and track record and performance (Loh and Ofori, 2000). Besides, the performance of subcontractor is evaluated and entered into a registration system. Loh and Ofori (2000) conducted a survey to compare the performance of registered and non-registered subcontractors, and the results confirmed that registered subcontractors outperformed the non-registered one which further testified that proper measurement and recording of performance could help at least maintain if not improve subcontractors’ quality.

Voluntary Subcontractor Registration Scheme: A voluntary subcontractor registration scheme has been embarked in Hong Kong since 2003, which comprises a primary register with relatively simple and accommodating entry requirements (PCICB, 2002). The voluntary scheme will subsequently be turned into a mandatory measure with more stringent criteria and grading of individual capacity. Although the industry keeps appealing for raising the performance standards of subcontractors, only few subcontractor performance appraisal models have been documented in Hong Kong, and the one being implemented by the Environment, Transport and Works Bureau for evaluating main contractors and subcontractors is perhaps the most comprehensive one (ETWB, 2005).

OBSERVATION Although the above international best practices show an increasing emphasis of using subcontractor management to improve subcontractor’s performance, all are proposed by the clients while majority of contractor worldwide still select subcontractors according to the price. Recently, some contractors have started to adopt the best value selection method. For instance, Layton’s “10-step subcontractor selection process” is a model promoting the best value selection method. Layton Construction Company believes that “the best and first way to achieve quality workmanship is to partner with the right subcontractors for the project” (Layton, n.d.). Subcontractors are invited to participate in the preconstruction phase to assist in budgeting, scheduling and planning. Not only price but also the quality and schedule performance will be considered when the best value subcontractors are selected.

Recognising the importance of subcontractor’s performance and the lack of best practices in subcontractor management by the main contractors, many research efforts have been contributed to this area. For example, Kumaraswamy and Matthews (2000) illustrated that better time and cost control can be achieved by incorporating the partnering principles between subcontractors and main contractors. Ekstrom et al (2003) developed a prototype rating tool “TrustBuilder” to facilitate qualitative subcontractor performance information sharing between practitioners by calculating a weighted rating based on the source credibility theory. Based on the information collected from experts, a conceptual framework for a case-based reasoning system for subcontractor selection was devised by Luu and Sher (2006), and the lessons learned in previous cases can be made available to the main contractors during selection phase. Recently, the collaborative efforts of the Chilean Construction Chamber, the Catholic University Production Management Center and several construction companies have led to a new subcontractor management method and tool. By developing an on-site evaluation method based on the lean principles and partnering practices, the model allows contractors to uplift subcontractor performance through periodic performance feedback (Maturana et al, 2007).

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KNOWLEDGE AND INFORMATION REQUIREMENTS Successful application of knowledge management in the subcontractor management domain depends on a careful scrutiny of the knowledge and information required for supporting this type of decision. The key issue is, therefore, to identify what knowledge can be generated from the information accumulated. Of various information pertinent to subcontractor management the performance of subcontractors is particularly indispensable to decision-makers as it would help generate useful knowledge on critical success factors and benchmark for subcontractors with different resource levels and experience. This should facilitate contracting department to determine which subcontractors shall be given more opportunity to bid; planner department to formulate the expectation on subcontractors; and subcontractors to improve their performance on a continuous basis. Table 1: Information requirement for subcontractor management

Information Required A B C D E F G H I J K L M N O P

Quality or workmanship * * * * * * * * * * * * * * * *

Schedule * * * * * * * * * * * * * * * *

Safety * * * * * * * * * * * * *

Relationship / cooperation * * * * * * * * * * *

Documentation * * * * * * * * * *

Communication / coordination * * * * * * * * * *

On-site supervision * * * * * * *

Subcontractor management * * * * * * *

Environment * * * * * *

Comply with laws / regulations * * * * * * *

Claims / change orders * * * * * *

Competent of personnel * * * * * * *

Cost * * * * * *

Adequacy of equipment * * * * *

Effective project management * * * *

Sufficiency of material * * * *

Promptly payment of S/C * * * *

Diligence in completing work * * * *

Attendance to emergency * * *

Comply with project authority * *

Warranty *

Meet subcontract bid package *

Design *

Industry awareness * Note: A: ACOE (1993); B: MDOT (2004); C: State of California (n.d.); D: State of Wisconsin (n.d.); E: City of Seattle (n.d.); F: Washington State Government (2003); G: DCAM(2006); H: ODOT (2000); I: LANL (2005); J: DOHK (2001); K: DOD(2004); L: Queensland Government (2003); M: NSW (2003); N: DTI (2006); O: DOI (2006); P: ETWB (2005).

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A major literature review has been conducted to identify the information pertinent to subcontractor performance (Table 1). Information can be summarised into those related to the “quality or workmanship”; “schedule”; “safety; “subcontractors’ ability to communicate”; “relationship with relevant bodies and other subcontractors”; and “timeliness in furnishing the required documents and reports”. Besides, the “effectiveness of on-site supervision”; “job site maintenance”; “delivery and storage of materials”; “management of lower tier subcontractors and suppliers”; “compliance with environmental laws, ordinances, regulations and standards”; “cost”; “claims”; and “sufficiency in resources” would also be useful to subcontractor management.

KNOWLEDGE MANAGEMENT FRAMEWORK Kamara et al. (2002) believed that having the knowledge about the abilities of subcontractors and suppliers is one of the key aspects in any knowledge management strategy. Knowledge management involves the creation, generation or acquisition of that knowledge and should be supported by information and communication technologies (ICT). Unlike other industries such as advanced manufacturing industries and automotive industries, the uptake of ICT in construction industry is relatively slow and effective (Peansupap and Walker, 2005). Considering the number of subcontractors involved, the use of ICT should provide a good opportunity to streamline the information collection and knowledge generation. To do that necessitates the development of a conceptual framework for an ICT-based knowledge and information model for subcontractor management.

Based on the current practice of subcontractor management, a conceptual framework consisting of four major components has been proposed.

Component 1 – Definition of objectives and expectations: The first component strives to establish the expectations and strategic objectives that best reflect the requirements of the client, project and external environment. However, as certain clients’ expectations and strategic objectives may not be totally apparent while the others could be influenced by design change or unforeseen circumstances, consensus amongst stakeholders is needed to eliminate any unnecessary arguments.

Component 2 – Formulation of criteria and performance indicators: This component aims to establish a list of information requirements for a specific type and size of subcontractor. DCAC (1999) pointed out that it is important to ensure that performance information shall be corresponding to clients’ expectations and strategic objectives. Having established the information, the method of measurement, data source, and time period for measurement will be defined to facilitate subsequent appraisal.

Component 3 – Appraisal: This component evaluates the performance of subcontractor against the performance indicators and generates an index to reflect the quality of subcontractor on every single aspect (Li et al, 1997) to support subcontractor registration, selection and management. To encourage continual improvement, performance benchmarks are made available to subcontractor (Watson, 1993).

Component 4 – Feedback and appeal: The final component provides a means for participants to express their opinions regarding the model’s reliability and a route for subcontractor to appeal in case they do not satisfy with their performance rating. Careful scrutiny to the clients’ expectations, strategic objectives, performance indicators and appraisal process is essential to ensure the outcomes are trustworthy enough to assist subcontractor to identify their deficiencies and improve accordingly.

CONCLUSIONS Nowadays, subcontractors assumed a significant role in construction projects resulting in a heavy reliance on effective selection and management of subcontractors. Without a

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systematic way to solicit and reuse the data pertinent to subcontractors, decisions on subcontractor selection and management tend to rely on individual judgement. Therefore, in this paper, a knowledge management approach has been proposed to support subcontractor management decisions. The international best practices for subcontractor management have been highlighted. In view of a divergence in the practice of subcontractor management, more research studies are needed to consolidate the practice and to devise a set of practice notes to help the industry to progress.

Adopting the concept of knowledge management, the information pertinent to managing subcontractors has been summarised. Nevertheless, since there are different types and sizes of subcontractors, the information requirement may vary from one subcontractor to another. Therefore, it is desirable to delineate the information to be kept in the knowledge management model based on the specific characteristics of the subcontractors and project requirements. With the advancement in information and communication technology, there is a good chance that an ICT-based knowledge management system for managing subcontractors be built. The conceptual framework being proposed in this paper therefore provides a good foundation for the development of this kind of model. It is believed that proper collection and use of knowledge and information for subcontractor management could help improve contracting department in determining the bid opportunities; enable project team to set performance thresholds for subcontract works; facilitate subcontractors to benchmark and improve their performance.

ACKNOWLEDGMENTS The authors are grateful to the Research Grant Council for supporting this research project financially under the Competitive Earmark Research Grant (No.: 7120/04E).

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